What are Statutory Financial Statements?
What are statutory financial statements? Depending on the jurisdiction of your company, you will have to submit a set of statutory basis financial statements that detail important information about your company. The United Arab Emirates is one of the countries that requires annual statutory financial statements every year.
What do you need to know to make sure you meet all the requirements? Well, you’ll need to prepare three main documents:
- Balance sheet
- Income statement
- Cash flow statement
In this article, we’ll go through all the details.
Statutory Financial Statements
Statutory financials are all the financial statements for your business. These statements have information about your company’s income, financial health and more. What documents are included within the statements? Here’s a helpful breakdown:
No matter the size of your entity, a balance sheet is necessary to fully understand your financial health. A common way to prepare the balance sheet is by using the T-account method, which puts assets on the left side and liabilities and shareholder equity on the right. You then try to balance both sides of the sheet throughout your calculations.
Another one of the three crucial financial statements in accounting is the income statement. If you’ve ever heard of a Profit & Loss statement, or a P&L, rest assured that this is precisely what we’re talking about. The income statement focuses on tracking your company’s revenues and expenses during your chosen accounting period, whether it be quarterly, biannually or annually. You might also hear this referred to as revenues and expenses.
Cash Flow Statement
The last of the three primary statutory basis financial statements is the cash flow statement. This statement demonstrates the net amount of cash and cash-equivalents being transferred in and out of a business.
Why is cash flow so important? Because an entity’s ability to provide value to its shareholders comes from its ability to maintain cash flow even after outflow. This maintains its capital and shoulder operating activities, which are called free cash flow (FCF).
There are three types of cash flow which all must be included in the cash flow statement:
- Operating cash flow comes from your enterprise activities
- Investing cash flow is all cash coming from investments in other business ventures or capital.
- Financing cash flow includes any payments your enterprise makes as well as any earnings from issuing equity or debt.
Statement of Changes in Equity
In addition to your balance sheet, cash flow statement and income statement, you will also have to present a statement of changes in equity. If you’re in the US, you might have heard the terms “retained earnings statement” or a “statement of shareholders’ equity”; these are the same as a statement of changes in equity. This statement, depending on the financial statutory reporting standard, can either be a separate document in the income statement or balance sheet or stand on its own.
This document provides an update on the volume of the earnings a company holds with the aim of using it for future projects. This statement provides an idea of how a company aims to use its profits to propel growth, whether it be to reinvest back into the firm or to pay off any debt they have.
Why does jurisdiction matter for statutory financial statements?
Along with the essential financial statements, there are some other crucial pieces to reporting your statutory financials. As we previously mentioned, the key to statutory financial statements is the jurisdiction. Every country has specific requirements for how to prepare the documents, but the first thing to determine is what set of financial reporting standards to follow. There are two primary financial reporting standards, GAAP (Generally Accepted Accounting Principles) and IFRS.
The GAAP standards are most commonly used in the United States and all companies that publicly trade in the United States must comply with them. IFRS, or the International Financial Reporting Standards, is the international equivalent that currently applies in 120 countries, including the United Arab Emirates and the European Union.
The goal of IFRS was to standardise accounting reports across countries. While the US Securities and Exchange Commission is not planning on switching to IFRS, they have made efforts to allow companies to supplement information prepared under IFRS standards in place of sections that would have had to be prepared under US GAAP regulations.
Depending on whether you have to follow the GAAP or IFRS accounting standards, the statements and regulations you use to prepare your financial statements will differ. When creating the statement, explain your methodology in the Notes to Financial Statements along with any assumptions you end up making for your calculations. For compliance purposes, it’s necessary for a statutory auditor to know if you prepared your statements using US GAAP or IFRS regulations.
How do I make a statutory report?
To make sure you complete the mandatory financial statements listed above and the Notes to Financial Statements, our team of experts in financial statutory audits will help you prepare your statutory financial statements. They will then work on the Report of the Statutory Auditor needed to finalise those numbers.
Whether you are looking for help in finishing your annual declarations or for periodic maintenance year round, we offer the best solution to meet your needs.
Are you ready to start preparing your statutory financial statements for the next reporting period? Contact us today.
CEO, Europe Emirates Group